How to Invest if You’re not a Millionaire

If you’re fresh out of school and just getting started in your career, one of the issues that is probably in the back of your mind is investing to ensure a secure retirement. The bursting of the real estate bubble and the lackluster performance of today’s stock market will, understandably, cause some concern.

It is possible, though, to develop a long-term strategy that can provide you with a comfortable living in your golden years.

The key here is long-term. Most of the big losers in the 2008-2009 crash (and in previous crashes as well) were people who were heavily invested in short-term, high-risk securities. While this strategy can offer higher returns, when planning for the future, investments like real estate flipping and some of the other highly touted investments of the past few years are dangerous strategies that can jeopardize your long-term economic health.

The key to successful long-term investment is to find investments that offer modest, but steady returns with relatively high security of your principal. While interest rates in the 2-3 percent range might not sound like much, thanks to the principle of compounding, over a 30-40 year period, they can generate a significant nest egg.

Following are some recommended investment strategies for obtaining modest, long-term growth.

401(k) and Thrift Savings Plans (TSP): For government employees, the TSP operates like a 401(k), allowing them to invest a portion of income (with matching funds from employers) with taxes deferred. Money can be invested in a variety of securities, from government-backed bonds to common stocks. The safer government-backed securities should form the largest percentage of your portfolio. During periods of declining stock prices, money can be shifted to the common stocks to enable you to buy more shares at a lower price, but when prices start to rise, contributions should be shifted back to the safer securities – especially in your early years. Resist the temptation to dump common stock shares when the market falls. This is a common mistake novice investors make and is a guarantee of loss.

Money Market Accounts and Certificates of Deposit: Although they are fully taxable, money market accounts and CDs, with banks that adhere to conservative lending practices and maintain adequate reserves, provide a modest but steady return over the long haul. I invested $2,000 in CDs in 1976, and 43 years later that initial investment has grown to over $900,000. A return of 2 – 5 percent interest on two thousand dollars was not very impressive, but on nearly one million, it is real money.

Insurance: Few people think of life insurance as an investment, but a policy that has a cash surrender value will grow over time. Though returns are modest, a simple $100,000 policy, purchased in your twenties represents a significant asset in your mid-sixties. In addition to providing immediate cash for your survivors if you die, the cash value is money you can use for other investments if your cash on hand is sufficient to handle funeral and other after death costs.

As an example, I purchased a $100,000 life insurance policy from United Services Automobile Association (USAA) in 1977, with premiums of $100 per month. In 2009, my total investment has been $38,400, but the policy has death benefit value of $132,550 and can be cashed out at nearly $35,000.

Real estate: Despite the dismal condition of the real estate market, this is still a sound long-term investment. A fixed rate mortgage provides tax offsets during your high-earning years and when it is paid off is a comfort in your retirement years.